3Ware 2004 Annual Report Download - page 57

Our operating results depend on manufacturing output and yields of our ICs, which may not meet
expectations.
The yields on wafers we have manufactured decline whenever a substantial percentage of wafers must be
rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many
factors, including minute levels of contaminants in the manufacturing environment, design issues, defects in
masks used to print circuits on a wafer, and difficulties in the fabrication process. Design iterations and process
changes by our suppliers can cause a risk of defects. Many of these problems are difficult to diagnose, are time
consuming and expensive to remedy, and can result in shipment delays.
We estimate yields per wafer in order to estimate the value of inventory. If yields are materially different
than projected, work-in-process inventory may need to be revalued. We may have to take inventory write-downs
as a result of decreases in manufacturing yields. We may suffer periodic yield problems in connection with new
or existing products or in connection with the commencement of production at a new manufacturing facility.
We may experience difficulties in transitioning to smaller geometry process technologies or in achieving
higher levels of design integration and that may result in reduced manufacturing yields, delays in product
deliveries and increased expenses.
We expect to transition our IC products to increasingly smaller line width geometries. This transition will
require us to migrate to new manufacturing processes for our products and redesign certain products. We
periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process
technologies to reduce our costs and increase performance, and we have designed IC products to be
manufactured at as little as .13 micron geometry processes. We have experienced some difficulties in shifting to
smaller geometry process technologies and new manufacturing processes. These difficulties resulted in reduced
manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties,
delays and expenses as we continue to transition our IC products to smaller geometry processes. We are
dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We
cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to
maintain our relationships with our foundries. If we or our foundries experience significant delays in this
transition or fail to implement this transition, our business, financial condition and results of operations could be
materially and adversely affected. As smaller geometry processes become more prevalent, we expect to continue
to integrate greater levels of functionality into our IC products. We may not be able to achieve higher levels of
design integration or deliver new integrated products on a timely basis.
We must develop or otherwise gain access to improved IC process technologies.
Our future success will depend upon our ability to improve existing IC process technologies or acquire new
IC process technologies. In the future, we may be required to transition one or more of our IC products to process
technologies with smaller geometries, other materials or higher speeds in order to reduce costs or improve
product performance. We may not be able to improve our process technologies or otherwise gain access to new
process technologies in a timely or affordable manner. Products based on these technologies may not achieve
market acceptance.
The complexity of our products may lead to errors, defects and bugs when they are first introduced, which
could negatively impact our reputation with customers and result in liability.
Products as complex as ours may contain errors, defects and bugs when first introduced or as new versions
are released. Our products have in the past experienced such errors, defects and bugs. Delivery of products with
production defects or reliability, quality or compatibility problems could significantly delay or hinder market
acceptance of the products or result in a costly recall. This, in turn, could damage our reputation and adversely
affect our ability to retain existing customers and to attract new customers. Errors, defects or bugs could cause
problems with device functionality, resulting in interruptions, delays or cessation of sales to our customers.
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